Bankruptcy is a significant financial decision that can have lasting implications on your credit score and financial future. While it provides a way for individuals overwhelmed by debt to get a fresh start, it may also come with consequences, particularly for your credit score. Here are some ways that bankruptcy can impact your credit score and what you can expect. If you want to discuss a possible bankruptcy, speak with our bankruptcy lawyers at Reed Law Firm, P.A. right away.
Immediate Impact
If your credit score is good, filing for bankruptcy will have an immediate negative impact on your credit score and your credit score is likely to drop significantly. However, if your credit score is already bad due to factors such as poor payment history, high debt ratios, foreclosures, repossessions, etc., then the bankruptcy will most likely improve your credit score within the first year after filing. If you already have bad credit, the best way to think about your credit score is to ask yourself where you would be in the next two years. If you do nothing, your credit score will probably still be bad or worse in two years. However, if you file a bankruptcy to eliminate your debt, your credit score will be much better than if you had done nothing at all.
The Type of Bankruptcy Matters
There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. Chapter 7 typically stays on your credit report for ten years from the filing date, while Chapter 13 remains for seven years. The impact on your credit score might be slightly different based on the type of bankruptcy.
In the case of Chapter 13 bankruptcy, you’ll be on a structured repayment plan for three to five years. Successfully completing this plan can demonstrate your commitment to repaying your debts, which might be viewed more favorably by future creditors and lenders. However, the bankruptcy notation will still remain on your credit report.
Obtaining New Credit
There is no rule preventing you from getting credit due to a bankruptcy. You can get credit as soon as a lender is willing to give you credit. While it can be challenging to obtain new credit and lenders may view you as a higher risk borrower, remember that it would have already been that way if your credit score was bad before you filed the bankruptcy. Some things are easier than others and you may need to start with secured credit cards or smaller loans to rebuild your credit. Normally within two years, most people’s credit will be good enough to obtain a mortgage.
Credit Score Recovery
It is normally not as difficult as most people think to rebuild your credit score over time. Responsible financial behavior, such as making timely payments on new debts, keeping credit card balances low, and avoiding late payments, can gradually improve your credit score. Many individuals will see significant improvements within a few years of bankruptcy.
Credit Counseling
It’s often a requirement to complete credit counseling as part of the bankruptcy process. This can help you develop better financial management skills and make more informed decisions about credit, which can contribute to your long-term financial health.
Credit Reporting Period
The bankruptcy notation will remain on your credit report for the duration mentioned above, but its impact on your credit score will lessen over time. As long as you maintain responsible credit habits, your credit score can start to recover even before the bankruptcy falls off your report.
Discuss Your Options With a South Carolina Bankruptcy Attorney
Bankruptcy can have a negative impact on your credit score initially, but it’s not a permanent stain on your credit history. With time, responsible financial management, and patience, you can work toward rebuilding your credit and achieving a healthier financial future.
If you’re considering bankruptcy, it’s essential to consult with a bankruptcy attorney from Reed Law Firm, P.A. about your options. Contact us to learn more today.
